Some startups begin life in the family garage, but professor Christof Fezter’s home depends on a server in the basement from his latest venture for heat and hot water.

Fetzer is one of three co-founders of Cloud&Heat GmbH, a startup based in Dresden, Germany that aims to heat up the market for the green cloud.

In the basement of his 210-square-meter home (about 2,260 square feet), the prototype server rests in a fireproof “data safe.” The heat generated by the servers churning data — some of it for his computer science students at the Dresden University of Technology — heads into a buffer tank for hot water, a concept also known as a data furnace. A centralized air handling system for the waste heat keeps the home cozy in the winter. The hot water tank provides warm drinking water for the house and the showers, it can also power radiators in the whole house or a group of apartments.

Working with Jens Struckmeier, Fetzer incorporated the server-heater system into the sleek, two-story structure he was building to fulfill the blueprint of an energy-efficient passive house in 2009. That trial became the cornerstone for Cloud&Heat with co-founders Struckmeier as CTO and René Marcel Schretzmann joining as CEO. Since beginning operations in 2012, Cloud&Heat has spread its model to 464 server systems throughout Germany. Future plans include radiating out to countries with similar building standards such as Austria and Switzerland and a pilot project in California’s Silicon Valley.

Cloud&Heat provides a distributed Infrastructure-as-a-Service cloud based on servers that are located in eco-friendly residential or commercial buildings, powered by OpenStack. They first started experimenting with a local deployment using the early OpenStack Cactus release and have since upgraded and entrusted Havana to run the show. The set-up is straightforward: servers, in self-contained fireproof cabinets, are installed in the basements of private and commercial buildings. The cloud-heaters are connected via broadband Internet with minimum speeds of 50 Mbit/s, separate from private Internet connections. To allay concerns about housing the servers in this new way, data is decentralized, triple-replicated and encrypted. The company offers single-rack installments with normal broadband connections and larger installations with connections to multiple backbones for redundancy. Between one and six cabinets (“data safe”) form an individual OpenStack deployment and they all share the same authentication through one OpenStack Identity (code-named Keystone) service.

The business model rests on a foundation of energy efficiency, competitive pricing and data protection that meets stringent German standards. The model is two-pronged: one set of customers have a cost-effective cloud and the other save on cost-efficient heating. Cutting costs on the cooling of servers while providing heat for homes is proving to be a winning twofer, earning the company customers as well as awards. Cloud&Heat won the 2013 with the Saxon Environmental Award was named a finalist in the German Industry Innovation Award.

“About 60 percent of the costs of a classic data center provider are building costs and cooling costs,” says Amir Feghhi, head of business development at Cloud&Heat. “We’re able to combine those costs and pass along a significant saving to our customers. We provide Amazon-compatible cloud service that fulfills strict German data protection laws” After Edward Snowden leaked the National Security Agency’s mass surveillance program in 2013, Feghhi adds, “Customer running businesses in the European Union became more aware that the provisions of the Patriot Act conflict directly with German and EU data protection laws and are seeking for solutions hosted locally.”

Cloud&Heat, whose customer base is strong on the German startup scene, partners with Bitnami to offer a library of over 90 popular open-source applications. Feghhi says it’s a great way to give startups a real application scenario — so they can start a blog with WordPress, for example. “We saw a quick win for us in terms of how we position ourselves with customers and we’ve been quite happy with Bitnami so far,” Feghhi says.

In terms of advice for replicating the company’s success, Amir Feghhi points to a major difference between funding in Germany and the U.S.

“Venture capitalists in Germany expect a running ecosystem (a cash cow) almost from day one,” Feghhi says. “But a complex business model like ours which combines two different markets — the heating and cloud markets — into one single product requires a lot of endurance and patience as well as very good market positioning, including branding.”

With Cloud&Heat, homeowners shoulder part of the cost, paying about EUR€10,000 plus tax (about USD$13,400) for a heating system that provides them with heat and hot water for 15 years at no additional cost. That cost is about what homeowners can expect to pay for energy-efficient heaters that are becoming mandatory on new construction in Germany. The contract stipulates a maintenance window with twice-yearly check-ups and provisions for sorting out eventual server meltdowns – and not by demanding access to your basement at 3 a.m.

“We’ve designed the system so that there shouldn’t be any problems like that,” Stefan Schlott, lead cloud architect, says. “There are always three or more API endpoints of the same functionality. So if one goes down it doesn’t make a big impact.” Like many cloud providers, he says, the idea is not to put all the customer’s eggs in one basket. “If one end point goes down, there are still five others to catch up. There’s a built-in safety buffer in terms of the amount of time we have to react.”

There have been a few other challenges, Schlott says. “It’s never that simple to make a distributed cloud work right,” he says. “It’s much easier with a big data center and local area network within the data center so there’s one big pipe going out and going in.” Schlott, however, cites the examples of OpenStack roadmap and features already implemented — like OpenStack Object Storage (Swift), with its storage distributed storage across multiple regions, the newer OpenStack Orchestration (Heat) layer or CERN’s Rackspace federated cloud. “It’s still not that common but it’s doable,” he adds.

Now that the home model has proven itself sturdy, Feghhi is in talks with another natural place for the concept: hotels.

“A number of hotel chains in Germany have said it’s very, very interesting to them, because they need to provide hot water all year round,” Feghhi says. In a larger building, you can place a lot of heaters — meaning cloud servers — in one location and guarantee that heat is always used because there’s also space for the buffer tanks to store the heat. “All those hotel guests need to take hot showers every day, so it’s a perfect fit.”